Motivating employees with some combination of equity ownership and long-term compensation is the key to boosting the profitability of asset management firms, according to a recent survey.
In their 2005 Business Benchmarking Survey, Darien, Conn.-based money management consultant Casey, Quirk & Associates and Stamford, Conn.-based compensation consultant McLagan Partners said an initial model they built using the survey's findings suggest a firm offering its employees no equity or long-term compensation could add almost 10 percentage points to its operating margins over time by introducing a strong incentive program.
Such incentives are the "anchor" in a "chain of significant relationships" driving profitability, according to the survey report.
In an interview, Casey, Quirk partner Jeb B. Doggett, said providing strong long-term incentives contributes to lower turnover and improves a firm's ability to attract and retain talented people. Over time, that ability enhances investment performance, which attracts assets — boosting profitability, he said.
Philip Kim, an associate with Casey, Quirk, said the survey didn't make a distinction between "phantom" equity plans — structured synthetically to give employees a stake in the long-term financial success of their firm — and direct equity. However, the beneficial effect of phantom equity would be diluted if it were linked to the stock of a larger financial conglomerate and not directly tied to the asset management unit's performance, he said.
The authors didn't assume equity ownership was essential, positing that the absence of equity could be balanced by a sufficient amount of long-term compensation.